Don’t get caught by VAT trap

The VAT rate returned to 17.5% on January 1st 2010 and for most C-Stores this means around 1,000 lines that need to be repriced. As with everything we do there are choices that can be taken and this VAT change is no exception.

The black and white options are a) to spend the time and action the change swiftly and hope we don’t offend our customers with the new higher prices, or b) to delay the change and bring in the new retail prices as we buy new stock.

I have done some calculations on the effect of the undertaking the latter option, and produced this table that shows the damage to profit margins by not levying the additional 2.5% VAT.

What is revealed is when a product has a high profit margin, an increase in VAT will affect that margin relatively negligibly. However, for products with smaller margins, such as cigarettes, a 7% gross profit will be eroded by almost 40%, from 39p per pack to 25p per pack in this example, if you do not reprice your stock.

This change is one that can not be delayed, so start early. I will be increasing prices on the high value/low margin products first, and will then move on to the categories that will stop us losing the as much profitability as possible.